How Much Do You Really Need to Know About Money?

Financial literacy quizzes say we could do better. But what do we need to know?

A recent story in sounded the alarm about Americans’ lack of financial literacy. According to reporter Robert Powell, “About three in four (74 percent) Americans failed a published as part of [a] survey by the American College of Financial Services New York Life Center for Retirement Income.”

This story was far from the only one kicking up hysteria about the dour state of financial literacy.

“94% of Americans failed this financial literacy quiz,” wrote CNBC.com in mid-September about a diagnostic from Financial Engines. “Two-Thirds Of Americans Can’t Pass A Basic Financial Literacy Test. Can You?” asked a June headline from Fox News, about the most recent results from the FINRA Foundation’s Financial Literacy Survey.

The headlines were frustrating to read, because I feel that some of these quizzes aren’t measuring our ability to handle money; rather, they’re quizzing us on our ability to define terms and solve math problems. And I wondered if—like a high school teacher charged with prepping students for a specific state exam—this approach runs the risk of leading us to spend our limited time and resources on the wrong things. So, I called financial literacy experts, including those charged with some of these quizzes, to find out. Here’s what I learned.

The Gap Between Knowing and Doing Is Intentional

First, these measurements of financial literacy aren’t meant to measure whether or not you’re doing the right things with your money.

That comes under the heading of financial capability, explains Dr. Gary Mottola, Research Director of Investor Education at FINRA. “Literacy is more focused on knowledge. Capability encompasses saving, controlling debt and financial knowledge.” (FYI: Financial wellness, which organizations like the CFPB are tracking, is even more broad, accounting for health and stress measures.)

Historically, Mottola says, the big three financial literacy questions FINRA asks (which date back to 2004, and the answers to which are at the end of this story) set out to measure three key areas of literacy:

The ability to understand and calculate interest rates. (Suppose you have $100 in a bank earning 2 percent a year, after 5 years, how much would you have? A) More than $102, B) Less than $102, C) Exactly $102, D) Don't know)

The ability to understand inflation. (Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After 1 year would the money in the bank buy more than it does today, exactly the same or less than it does today? A) More B) Same C) Less D) Don’t know)

And the ability to understand risk. (Buying a single stock usually provides a safer return than a stock mutual fund. A) True B) False C) Don’t know)

Additional questions were added later, and concern what happens to bond prices if interest rates rise; whether you pay more or less interest with a 15-year mortgage than a 30-year; and how many years it would take $1,000 borrowed at 20 percent interest to double if you make no payments. (You can take the full quiz , or just skip to the end of the article to see if you got the answers to these questions right.)

When it comes to the gap between knowing and doing, Mottola says: “I don’t think you can say one is more important than the other.” And financial literacy expert Dr. Lewis Mandell says that no matter what you’re measuring, the numbers aren’t going up. As if to put a period on his remarks, the CFPB released its first financial well-being measures in late September: More than 43 percent of American adults are struggling to make ends meet.

Financial literacy might not tell the whole story, but the available measures of financial capability aren’t much more encouraging.

The Limitations of High School and College Classes

Part of this problem is that there isn’t enough time in the school day to cover these lessons fully. Think about how topics like earth science and American history are covered in school.

You get them on a very basic level in grade school; again, typically, in middle school; and again, more substantially, in high school.

“That [approach] doesn’t happen with the guiding principles of financial literacy,” says Mitchell Roschelle of the PWC Foundation, which works to build financial capability and technology skills among students. According to the Council for Economic Education’s Report, “The 2016 National State of Financial & Economic Education,” only 17 states require students to take a high school course in personal finance, and just 20 require a high school course in economics.

The other factor is a timing problem. “Even if you can compel young people to sit in a personal finance class, they don’t have much of an interest when they’re young,” says Mandell. “U.S. law [in the form of the CARD Act] has even taken the credit card out of the equation for people under 21. So questions don’t come up at a young age.”

Consider Just-in-Time Solutions

Adjusting the timing (and, in fact, the time) of personal finance education may be part of the solution for making the lessons stick. One thing we’re learning is that lessons do sink in when they’re conveyed more closely to the point of sale, so to speak.

Before joining George Washington University, where she founded the school’s Global Financial Literacy Center, Annamaria Lusardi was a professor at Dartmouth College. While there, she was called on to help solve a problem: The non-faculty employees were not contributing to the supplementary retirement account the school offered. What could they do to get them to take advantage of this valuable benefit?

As academics tend to do, Lusardi and her colleagues began with research. They talked to these employees, most of whom were women, about why they weren’t participating. What they heard was that employees “didn’t know where to begin,” “there were several steps to take,” and “they were focused on taking care of their families.” In other words, the problem was more about process than it was about finding money to save. Therefore, the researchers put together a one-pager outlining what had to be done, including that you needed to sit down in front of a computer, and that it took as little time as unloading a dishwasher. They also produced short videos of current participants talking about how being in the program made them feel, which was that they were doing something good for their families. Then, they started delivering both the videos and instructions at new employee orientations. The amount of money in the program doubled in a month. Lusardi is less boastful of the results, noting they were starting from a very low level.

Still, it’s not the only example. Years ago, well before the CARD Act, Wells Fargo conducted an experiment on a college campus. Students who applied for credit cards were offered a small giveaway in exchange for taking a 15-minute online tutorial on how best to use their new cards. Then the behavior of the students was tracked. The ones who took the tutorial were more likely to pay their bills in full, and less likely to have late payments or go over their limits.

It makes sense to Roschelle. “Before you get a driver’s license, you have to pass a written test and a road test,” he says. But Lusardi is careful to point out that there are times—when you purchase a house, for instance, when education might come just as you apply for a mortgage—that it might be too late. “By that time, they’ve fallen in love with a house they can’t afford and already decided what color to paint the walls,” she says.

Focus on Life Skills Rather Than Literacy

Perhaps we need a combination of both. But whether we’re looking far ahead, or right around the corner, what exactly should we be putting our energies toward teaching? I posed that question to each of my sources for this story. Here’s a top six of their combined suggestions:

1.Wants vs. Needs: Know the difference and try to manage your money according to it.

2.Money invested grows over time… And so can money borrowed. In other words, the power of compounding can work in your favor, and against it. (With the codicil that if it’s on a credit card, and you pay it off each month, you won’t owe interest at all.).

3.Understand the interest of your counterparty. How do they make a profit, and what do they want from you in a negotiation? You’ll do better as a result.

4.Learn how to research any purchase. Whether it’s an investment (with varying fees), a car, or a vacation, know how to go online and find out whether it’s a good use of your money. Money not spent is money saved.

6. Tend to your financial health. Finally, that you need to spend some time taking care of your financial health just as you spend time taking care of your physical health. If you don’t, as Lusardi puts it, good things are not going to happen to you.